Hawaii’s recovery continues, led by a better-than-expected performance from tourism. The visitor industry’s summer strength is sustaining moderate job gains in related sectors.
Much of the rest of the state economy remains relatively weak, and we continue to see net job losses in some areas.
The cooling of growth in the U.S. and overseas markets will be a challenge for tourism over the next year. We expect continued Hawaii expansion, but at a restrained pace through 2011.
The ongoing recovery of the overall Hawaii economy can be seen in the gradually improving employment situation.
Seasonally adjusted unemployment rates have fallen from 6.9% in the first quarter of the year to 6.3% in June and July. (They remain much higher on the Neighbor Islands.)
Nonfarm jobs broke back above 590,000 for the first time in nine months in April 2010, and they stood at 594,600 in July, up 1% from a year earlier. While the pace of gains is limited,
any improvement in labor market conditions is welcome news after what has been a particularly bruising job-centered recession.
As suggested above, the best news has come from the visitor industry, where we have seen strong performance since the end of the first quarter. During the April-July period, monthly visitor arrivals were 8.4% higher on average compared with the same period in 2009. Monthly visitor days were roughly 7.4% higher. This return of visitors has been relatively widespread, with every county posting their highest quarterly visitor counts in roughly two years.
The majority of increased arrivals have been domestic visitors. United States arrivals increased 4.1% in the second quarter. The June total of 397,600 U.S. visitors was the highest monthly count since March 2008. Domestic arrivals growth has been strongest from the West South Central (mostly Texas) and Pacific markets, both of which have had five straight quarters of year-on-year improvement.
Surprisingly, nearly half of the growth in the large Pacific market during that stretch came from Oregon and Washington State.
Despite these sizable gains, monthly U.S. visitor arrivals remain nearly 15% below their average level in 2006 and 2007.
The U.S. market was particularly hard hit by the financial crisis and global recession and so has further to recover than the international markets.
Among international markets, Canada has emerged as a particular area of strength. Since 9/11, Canadian arrivals have more than doubled from 40,500 in the fourth quarter of 2001 to a streak of thirteen straight quarters of 81,000 or more arrivals through the second quarter of 2010.
There was hardly a hiccup during the global recession, perhaps because economic conditions in Canada have remained relatively healthy. Canadian visitors also spend more time in the islands (an average 12.8 days) than American (9.9) or Japanese (5.8) visitors, and they have the highest overall trip spending, making them particularly valuable to the industry.
In June 2010, the statewide hotel occupancy rate of 74% The visitor industry is leading a gradual but uneven recovery in Hawaii.
The tourism upturn has not yet had much effect on the broader economy, and the slowing global recovery means further visitor gains will be harder to come by.
Monthly visitor expenditures have exceeded $900 million in four of the past five months; the last time monthly visitor expenditures were above $900 million was back in August
2008.
While both occupancy and expenditures are still well below even early-2008 levels, the sustained upward movement is heartening.
Despite these gains, prospects for continued visitor growth are tempered by poor growth prospects in primary visitor markets. As anticipated, U.S. and Japanese growth has
slowed considerably in recent months. After 6% growth in the fourth quarter of 2009, U.S. real gross domestic product (GDP) eased to 3.7% in the first quarter of this year and 1.6%
in the second quarter.
Consumer spending is lackluster and construction remains in the doldrums. Fiscal stimulus will begin to phase out in coming months. While we do not expect a double-dip recession, growth will remain anemic through 2011 before some strengthening builds. In Japan, consumer spending was flat in the second quarter and the stronger yen means less contribution from exports. Both the Bank of Japan and the government are planning further stimulus to try to keep recovery from faltering altogether. We expect both the U.S. and Japan to expand by just 2.7% for 2010 as a whole.
Other world regions appear stronger, in particular Northern Europe and dynamic East Asia, but the overall pace of global recovery is decidedly subpar.
The recent spate of bad news about the economy and the continuing challenges facing households will cause a slowing of visitor gains—but not a pullback—in coming months. Arrivals will rise 6.7% for this year as a whole, slowing to 2.7% in 2011.
The annual visitor count will remain below its 2006 peak until 2015.
This year’s visitor industry gains have translated into limited job creation in related industries. In Accommodations, Food Service, Retail Trade, and Air Transportation, employment has recovered to late-2008 levels. These four industries each saw 3-4% year-on-year job growth in July 2010, far above the state’s 1.0% overall job growth.
Growing health of tourism businesses and wage earners will eventually translate into increased investment and consumption that will benefit the broader economy. This spread of recovery beyond tourism has not yet begun in earnest.
Few non-tourism industries have shown much job creation.
Employment increases occurred in Health Care (2.7%) and Other Services (4.3%), while both the Government and the Arts and Entertainment parts of the economy were little changed. Most every other industry continued to show slight year-on-year losses in July: jobs were down 3.5% in Information, 2.6% in Professional and Business Services, 1.1% in Finance, Insurance, and Real Estate, and 4.0% in Wholesale Trade. Losses remain heaviest in Construction, which had 9.3% fewer jobs than last July.
Income data released in June for the first quarter of 2010 agrees with the limited nature of the private sector recovery.
Although current dollar personal income was 2.3% higher in the first quarter of 2010, more than half of that increase came in the form of current transfer receipts (government programs like Social Security and Unemployment Insurance).
Labor income, meaning wages paid to employed persons, increased by a weaker 1.1%, and private sector labor income actually fell 0.2%, but was offset by modest gains in Federal
government income.
This demonstrates the important role that Federal government spending has played in propping up the economy.
Military-related labor income was 9.6% higher and Federal civilian labor income was 8.5% higher in the first quarter.
This helped offset the net private sector losses in income and a substantial 6.1% year-on-year drop in State and Local government labor earnings, caused both by furloughs and a decline
in state payrolls.
Considering the fact that a large portion of Federal ARRA stimulus funds were granted to States for operational expenses, the drop in State and Local labor earnings would have been even larger if not for Federal support.
We expect the job and income picture to continue to improve at a moderate pace over the next two years. Total non-farm payroll jobs will expand by 1.3% in 2011, following this year’s anticipated 0.2% decline.
The forecasts for both years are roughly one-half percent higher than our June forecast, largely because of stronger growth in tourism related areas and an earlier stabilization in construction. The largest percentage job gains next year will be seen in Transportation and Utilities (5.1%) and the large Other Services sector (2.4%), which includes a broad array of services ranging
from entertainment to business management.
Construction, Wholesale & Retail Trade, and Health Care will see 1.5% or greater growth. Agriculture, Manufacturing, Finance Insurance & Real Estate and Government Sectors will continue to show net losses in 2011.
Inflation adjusted real personal income will rise 0.4% this year and 1.3% next year, firming
above 2% growth in 2012. The unemployment rate will continue to recede at a slow pace, averaging 6% in 2011.
Tax collections for the fiscal year ending in June 2010 were 3.9% higher than they were in the previous fiscal year.
The $162 million increase in the General Fund was primarily due to delays in income tax refunds, which pushed $187.4 million of revenue reduction into the current fiscal year.
While this refund shifting maneuver is unlikely to be repeated, a number of tax measures should provide enhanced revenues. A 1% hike in the Transient Accommodations Tax yielded an additional $25.7 million in FY 2010, and the TAT has since risen by one more percentage point (this will remain in effect through June 2015). An increase in the cigarette tax effective July 2010 raised an additional $3.4 million in its first month of operation. Overall, the State fiscal situation remains difficult but is headed in the right direction.
Recovery is underway in Hawaii, even if it has not yet touched all sectors. That recovery will gain strength slowly over the next several years, tempered by still-weak conditions in major visitor markets, drag from government, and a difficult environment for construction. The chief downside risks include a further deceleration of global growth, or deterioration in credit market conditions because of the ongoing European debt crisis. In any case, the relatively slow pace of recovery will pose challenges in the form of continuing high unemployment and lagging tax receipts.
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